Question

NutraLabs, Inc., leased a protein analyzer to Werner Chemical, Inc., on September 30, 2018. NutraLabs manufactured the machine at a cost of $4.75 million. The five-year lease agreement calls for Werner to make quarterly lease payments of $401,337, payable each September 30, December 31, March 31, June 30, with the first payment at September 30, 2018. NutraLabs’ implicit interest rate is 12%.

1. Determine the price at which NutraLabs is “selling” the equipment (present value of the lease payments) at September 30, 2018.
2. What pretax amounts related to the lease would NutraLabs report in its balance sheet at December 31, 2018?
3. What pretax amounts related to the lease would NutraLabs report in its income statement for the year ended December 31, 2018?
4. What pretax amounts related to the lease would NutraLabs report in its statement of cash flows for the year ended December 31, 2018?

Answer 1

1. Determine the price at which NutraLabs is “selling” the equipment (present value of the lease payments) at September 30, 2018.:

PV(0.12/4,5*4,401137,,1)=$6146943

2. What pretax amounts related to the lease would NutraLabs report in its balance sheet at December 31, 2018?

Date	Payment	Interest	Principle	Balance
				6146943
Sep 30	401337	0	401337	5745606
Dec 31	401337	172368.18	228968.8	5516637
Mar 31	401337	165499.1154	235837.9	5280799
Jun 30	401337	158423.9789	242913	5037886
*Interest= 12% for 3 months on Balance as on Last quarter
*Principle= Payment-Interest
*Balance=Previous Quarter Balance-Principle
Lease Receivable	6146943
Less: 30th Sep Payment	401337
Less: 31st Dec Payment	228968.8
Lease Receivable as on 31st December	5516637	to be recorded in Balance Sheet

3. What pretax amounts related to the lease would NutraLabs report in its income statement for the year ended December 31, 2018?

Interest Revenue of $172,368 will be shown in Income statement (Working-Refer part 2 above)

4. What pretax amounts related to the lease would NutraLabs report in its statement of cash flows for the year ended December 31, 2018?

Cash Inflows from Operating Activities: (Interest Portion)= $172368

Cash Inflows from Investing Activities: (Principle Portion)=401137+228969=630306 (Refer part-2 above table)

Significant Non Cash Activity:$6146942 direct financing lease to be reported as disclosure notes to financial statements.

Hi: this is because of Round off. Giving you answer based on your working of 6150000: Hope this will help

2
	Date	Payment	Interest	Principle	Balance
					6150000
	Sep 30	401337	0	401337	5748663
	Dec 31	401337	172460	228877	5519786
	Mar 31	401337	165594	235743	5284042
	Jun 30	401337	158521	242816	5041227
	*Interest= 12% for 3 months on Balance as on Last quarter
	*Principle= Payment-Interest
	*Balance=Previous Quarter Balance-Principle
	Lease Receivable	6150000
	Less: 30th Sep Payment	401337
	Less: 31st Dec Payment	228877
	Lease Receivable as on 31st December	5519786	to be recorded in Balance Sheet
	3. What pretax amounts related to the lease would NutraLabs report in its income statement for the year ended December 31, 2018?
	Interest Revenue of $172,460 will be shown in Income statement (Working-Refer part 2 above)
	4. What pretax amounts related to the lease would NutraLabs report in its statement of cash flows for the year ended December 31, 2018?
	Cash Inflows from Operating Activities: (Interest Portion)= $172460
	Cash Inflows from Investing Activities: (Principle Portion)=401137+228877=630214 (Refer part-2 above table)
	Significant Non Cash Activity:$6150000 direct financing lease to be reported as disclosure notes to financial statements.